KUALA LUMPUR - Troubled state investor 1Malaysia Development Berhad (1MDB) confirmed on Tuesday (April 26) that the non-payment of US$50.3 million (S$68.1 million) in interest over a now defaulted US$1.75 billion bond had resulted in cross-defaults for RM7.4 billion (S$2.6 billion) in other bonds.
The failure to pay the interest due on Monday arose due to a dispute with IPIC, an Abu Dhabi state-owned sovereign wealth fund, which had guaranteed two US$1.75 1MDB bonds due in 2022.
"Notwithstanding the dispute with IPIC (International Petroleum Investment Company), 1MDB reiterates that it will meet all of its other existing financial obligations and has ample liquidity to do so," said the Malaysian firm, whose debt pile of RM51 billion last year had fuelled calls for Prime Minister Najib Razak's resignation.
While 1MDB confirmed that it had to pay up an RM5billion sukuk due in 2039 and the RM2.4 billion Bandar Malaysia Sdn Bhd sukuk due between 2021 and 2024, other debt remained undisturbed. However, an RM800 million loan from Malaysia's Social Security Organisation (SOCSO) could possibly be called in due to a “material adverse effect” clause.
The RM5 billion sukuk and the loan from the social welfare body are both guaranteed by the government, which could also now be liable to more than US$6.481 billion which Abu Dhabi claims it is owed by 1MDB.
IPIC had on Monday said that it would pay the US$50.3 million interest instalment to bond holders, based on its commitments as the sole guarantor of the bond issue, only once 1MDB had defaulted on it.
The two state-owned outfits are feuding over fund transfers of roughly US$3.54 billion that 1MDB said it made to units of IPIC under obligation of a May 2012 bond agreement. But IPIC declared that it never received those monies, triggering questions about the payment of the US$50.3 million in interest that were due.
"Accordingly, whilst 1MDB has the funds to have made the interest payment, it is 1MDB’s position, as a matter of principle, that it was IPIC’s obligation to do so. Until IPIC accepts that all obligations have been met, 1MDB is obliged to withhold payments and will seek legal recourse and resolution," the Malaysian company said.
The dispute is the latest twist in the ongoing financial fiasco at 1MDB, a brainchild of Datuk Seri Najib that is now the subject of investigations in seven countries, including Singapore. The investigations, which centre on billions of dollars that allegedly have gone missing at the state-owned strategic investment fund, has put the spotlight on Mr Najib's administration as well as governance issues in Malaysia.
The fallout from the default was discussed at meetings between Mr Najib and 1MDB's president and group executive director Arul Kanda in recent weeks. According to government officials familiar with the meetings, Mr Arul informed the Prime Minister that the Malaysian government would be exposed to US$6.481 billion under indemnity clauses with IPIC in the event of a default.
The exposure, which amounts to roughly 4 per cent of the Malaysian government's outstanding debt, includes the US$3.5 billion bond, US$1.15 billion in cash advances and another US$481 million in a disputed payment the Abu Dhabi entity says it is owed, according to Malaysian government officials.
1MDB also said it has "proactively met with and explained the consequences of the IPIC dispute" to trustees and investors of its debt and "trusts that the respective parties and the financial markets in general, will understand this unfortunate default as being very specific to its dispute with IPIC and is not due to an inability to make payment when due".
The ringgit responded negatively to the news, moving down to as low as 3.93 against the dollar, from 3.91 when the market opened.